Mortgage standards are easing

David Ryder, BloombergA RE/MAX LLC "For Sale" sign stands outside of a home in Seattle, Washington, U.S., on Tuesday, Nov. 19, 2013. Purchases of previously-owned U.S. homes fell in October to the lowest level in four months as limited supply and higher mortgage rates restrained momentum in the housing-market recovery. Photographer: David Ryder/Bloomberg

One in four U.S. banks eased their mortgage-lending standards for prime borrowers during the second quarter — the largest such move since the housing crash began nearly a decade ago, according to the Federal Reserve. And a recent report from the Mortgage Bankers Association showed that access to mortgage credit has been rising steadily since late last year.

“The credit pendulum is swinging,” said Keenan Raverty, a vice president with Bell Mortgage. “We’re probably back to more historically normal standards.”

The situation, however, is far from normal for marginal borrowers. In January, federal rules were implemented that include tougher penalties for lenders who fail to provide solid verification for borrowers with less-than-perfect credit, a high debt-to-income ratio and difficult-to-document income. About one-third of lenders polled in the Federal Reserve study blamed those new rules for a lower mortgage approval rate for those who might otherwise be prime borrowers.

“Lenders are still being particularly cautious about those borrowers who are close to their maximums,” said Mary Tingerthal, commissioner of the Minnesota Housing Finance Agency (MHFA).

Despite a shift in standards for the best borrowers, there’s a broad swath of the population who won’t be able to buy, she said. The most common barriers are unusually high student-loan debt and income that is difficult to document, she said. That includes people with multiple jobs and those who are self-employed. Many households are still struggling with credit problems that began during the recession.

Tingerthal said while lenders have much deeper appetite for risk than they did in recent years, many are playing safe. The new federal rules come with the threat of steep fines for violations, and many lenders are still on edge after suffering through one of the most devastating periods in history for the industry.

“They [lenders] know more loans are being reviewed,” Tingerthal said. “So they’re afraid there could be a difference of interpretation.”

To help would-be borrowers who can’t quite meet the minimum requirements, the agency in September will announce a home buyer’s assistance program that will include home buyer classes, down payment support and credit counseling services specially tailored to those who are dealing with lingering credit problems.

Addressing these issues is critical to the ongoing health of the housing recovery and the broader economy. Mortgage applications for home purchases are down 13.6 percent over the past year, and applications to refinance are down 40 percent, according to a Wells Fargo/NAHB Housing Market Index.

The report showed some strengthening in July, but fewer consumers said they were planning to purchase a home in the next six months. That’s just one of the reasons lenders are looking for new ways of helping borrowers qualify.

“Credit availability will help home sales,” said Raverty, a past president and board chairman of the Mortgage Bankers Association of Minnesota and the Mortgage Association of Minnesota.

He notes that while many borrowers are still struggling, it’s unreasonable to expect getting a mortgage will ever be as easy as it was on the cusp of the crash. The current lending environment is like it was when he got into the business in 1994.

“We’re basically at that spot again,” he said. “In some ways credit availability is better than it is now than it was then, but our memory is short.”